Why GICs are a smart bet for short-term savings
Graham Christian
* This article is sponsored by EQ Bank
Until recently, GICs weren’t thought of as a way to achieve short-term savings goals like weddings and vacations. After all, you’d often have to sign up for a multi-year commitment to see any real return on your investment, and many people don’t like the idea of locking their money away for that long.
But with interest rates rising in the face of recent inflation, things have changed considerably. These days, short-term GICs, such as those offered by EQ Bank, boast competitive returns not seen in a very long time, and Canadians are paying attention. EQ Bank was selected as our Personal Finance Award winner for 1 year GICs (non-registered and registered) given their industry leading average interest rate for 2022.
While there are plenty of options when considering where to grow your savings, GICs offer a unique set of benefits that can help you reach – or even exceed – your short-term goals, so let’s dive in.
What are GICs and how do they work?
A guaranteed investment certificate, or GIC, is considered one of the safest investments available. This is because your principal amount is guaranteed to be returned to you, plus interest.
Here’s how it works: When you purchase a GIC, you agree to lock your lump sum investment away for a chosen length of time, known as the “term,” in exchange for a specified rate of interest. The terms generally range from 30 days all the way up to 10 years, and it essentially works like a pressure cooker for your money – set it and forget it! Left untouched, your investment will slowly accumulate interest, securely and safely. When the GIC reaches maturity (meaning its term has ended), you can cash out or reinvest.
Benefits of GICs
Here are four reasons why GICs are attractive to investors with short-term savings goals.
1. Guaranteed return
As we mentioned, the biggest draw of GICs is their lack of risk. When you purchase one, you’re entering into an agreement with the GIC provider that your principal investment will be returned to you along with the prescribed interest. That means no white-knuckling it through turbulent market conditions or watching helplessly as your money drains away. With a GIC, you’ll always know your money is safe and growing, and it will be there in full, with a little extra on top, when the term ends.
2. Added security
But what if the bank or credit union where you purchased your GIC dissolves? In that incredibly unlikely event, your investment is eligible for government protection, either by the Canada Deposit Insurance Corporation (CDIC) or a provincial organization. The CDIC provides deposit insurance for eligible investments of up to $100,000, per insured category, per depositor, at CDIC member institutions, while each provincial organization will have its own rules and regulations. Either way, your investment has an extra level of protection, allowing you to sleep easier.
3. Competitive interest rates
Of course, while all that safety and security is nice, you’re also looking to earn a respectable level of interest on your money. Thankfully, GICs are now offering generous returns. Rising interest rates across Canada have allowed providers to offer competitive yields on even short-term GICs, meaning you no longer have to trade liquidity for a decent interest rate.
4. Simple and easy
Last but not least, the most obvious benefit to saving with a GIC is how straightforward it is. You decide how much you want to invest and for how long, and then you leave it alone to mature. For those looking for a no-frills investment strategy, it doesn’t get much easier than that.
When to choose a GIC over a savings account
In some ways, GICs and savings accounts are quite similar: they both provide secure places to store and grow your money. That being said, there are some significant differences between the two, so let’s explore a few situations where choosing a GIC would be the smart move.
You’ve already saved a lump sum
Most providers require a minimum deposit for a GIC, though the amount varies. Many banks and credit unions ask for at least $1,000, but some will let you buy a GIC with much less (EQ Bank, for example, has an ultra-low $100 minimum deposit for GICs). With this in mind, GICs are a good option for those who have a lump sum they wish to grow with a better interest rate than what savings accounts typically offer.
You won’t need regular access to your money
A big difference between GICs and savings accounts is how freely you can access your funds. Once your money is locked into a GIC, you’re not meant to make any withdrawals or contributions—indeed, many GICs (including all EQ Bank GICs) are non-redeemable, meaning you can’t withdraw your funds until the maturity date. This is ideal for investors who are looking to protect and steadily grow what they have, but not so great if you need access to your money sooner than the maturity date. (Some financial institutions offer redeemable, or cashable, GICs, but these generally offer lower interest rates than non-redeemable ones.)
You prefer a fixed interest rate
While the interest earned on savings accounts can rise and fall according to the prime rate, most GICs have a fixed return rate that will stay the same for the duration of their term. While this means that you won’t get higher interest if the prime rate soars, it also means you’re protected in the event that the prime rate plummets, making GICs a great choice for investors who don’t want to worry about market fluctuations affecting their savings.
The bottom line
Whether you’re saving for a wedding, a new car, home renovations or a much-needed vacation, the money you’ve accumulated in pursuit of your goal is important and precious. GICs can offer not only an unmatched level of security for your investment, but also steady growth and a competitive rate of return.
Also read:
How to make the most of rising GIC rates
How to combat inflation in Canada
Are GICs worth it? 6 times when GICs make sense for investors